Introduction to Capital Flow 32 and class notes of August 5th, 2000.

----Importance of self, self-discovery, self-management, and reorientation
rather than retraining to more productive efforts.Answer is not in details, but
in exploring-advancing to higher platforms.

Having an advanced starting position is not one with detailed completeness,
but one for exploring. It is not an ending position that precipitates a
completed program. Its rather a continually forward moving base that is more
important than trading profits detailed for desired results. [One can compare it
the difficulty of climbing Mt. Everest without advancing the base camps to
successively higher levels.] Sameness eventually dies. Reorientation is better
than retraining as the current base is retained. For example, a General Motor’s
welder who is replaced by a robot can advance to a weld inspector because he
knows what a good weld is.

------Understanding time management—allows one to manage instead of working
directly. The markets need to be measured in terms of time –the
vertical/horizontal relationship of development. Time extension requires
non-random conditions, as there is no measurement for randomness as the net of
results of randomness is nothing. A big trader creates an advantage for himself
in the pits by extending non-randomness to his position. Random orders i.e.
alternating buy/sell are changed to non-random by the absorption of the counter
orders to his position. He can then measure time through remaining capital
versus the size of orders he needs to absorb. The reason for exchanges is that
the markets are indeed non-random as core order flow is of a consistent nature.
[The large trader is fitting the model of the market by using the principle of
non-randomness ---in other words, he is not forcing something totally unrelated
to normal market activity]

----The greatest benefit of managing through time is a default position of
unchanged on your side. To be measured in time something has to be happening,
and it has to be overcome before adversity can appear. Non-random conditions in
markets come from three different economic scenarios. Those related to
contracts, to exchanges, and the marketplace itself. Economics are just
measurements and to be measurable things have to be non-random. This allows a
pro-active management rather than a reactive one in that decisions are made
before time runs out rather than after it has. It also frees ones time before it
is needed. A trader needs to spend less and less time monitoring his program by
understanding, finding and utilizing non- random market conditions. Every type
of trade [regardless of duration] needs to have a non-random platform in order
to achieve the time reduction so vital to overhead costs.

-------What’s important to do and what’s not. The standard is called an
equivalency ratio. Where anyone can achieve success if the circumstances are
correct, it is then worth trying to do. The same holds for experiences outside
of our industry. The question is not whether one can do it better because its
contrived out of ideal circumstances, but that it’s worthwhile doing in
principle. Partial assimilation can then lead to success.

Individual growth is the main goal. It can be accomplished best by having an
elevated platform earned through ones own experience. Be a self-starter, take
control, and strive to get better. Second, work on techniques, watch what others
are doing, move outside your skill level, and be very observant. As you succeed
in these endeavors, the most important ingredient is to have a time reduction of
work effort at the bottom rung of the ladder. Productivity is a function of
output versus manpower. Manpower is declining as an ingredient of success as the
ability to manage offers a newer and exiting base in trading. One wants to take
his/her experience forward in a manner similar to reorientation rather a
retraining way. In other words, build upon what you have because you will gain
confidence and more importantly own and control the basis of your success.

Trade management

Trades should be thought of in terms of time duration rather than a monetary
one. The reason for this is that it fits the working piece of market activity
that best serves traders. Non-randomness is an extension of time created by a
force that overwhelms random activity. [The definition of random is that it
alternates and the definition of non-randomness is that it is consistent].
Whatever the force or circumstances are, they have to be overcome before the
market can change. This gives the trader unchanged on his side for a period of
time [equal to the undoing of the imbalance]. An equivalency of this would be
the same as someone taking all your losing trades so it very worthwhile to have
in your platform. This puts a trader in a less reactive mode, which allow the
reactive skill to be called upon in any situation deemed necessary rather than
being used as a basic repeated requirement.

Fundamentals of market opportunity

This calls for fitting the model of the market. As a trader, you need to
mimic [be in step] with its activity. The foundation of any market is its
liquidity as this allows the lowest entry/exit costs. Liquidity denotes a lot of
actual interest in a market because to be present others must think there is
some kind of opportunity there. [The equivalency relates to a full versus an
empty gaming table]

Entry and exiting are by far the most difficult things for a trader to do
well. The reason being is that the execution calls for a moment [for a price] of
the markets time and moments [also note that these are not organized into market
time] are random in nature----therefore the acknowledged difficulty. This also
makes shorter term trading more difficult as over a large sample size this
difficulty tends to be prevail. To further complicate this beginning and ending
procedure for trades is that the very foundation of liquidity is the fact that
the marketplace is disadvantaged rather than advantageous. Normal trading
environments call for an advantage to be successful, however those trades are
mostly just between two parties where one party is usually forced to take the
disadvantage due to other concerns. In a multiple participant atmosphere the
same disadvantages would apply to both sides especially considering the
immediacy needed for an at the market transaction. [You might wonder how both
sides could be disadvantaged at the same time, but there is logical explanation
that I’m keeping until the December 9th class] In other words, as a
pre-condition for liquidity, both sides [buyer/sellers] accept a below the bar
level functionality in order to secure the benefits of liquidity. Any good trade
then has to overcome this before it can begin to realize its potential.
Understanding this paradox will help traders in many ways----especially with
their expectations in shorter trade formats and in the amount of time used
trying to find an entry advantage. [There are many more fundamentals and actual
experiences that relates to the fact that liquidity is disadvantaged].

The natural advantage—time

Time and not price because time offers a great deal more and also is
available. It is derived from the fundamental need for exchanges in that
collective activity [versus individual] is non-random. Non-randomness produces a
time duration measurement that allows entry, exit, and trade management. All
trades just need to fit some length of time duration. Measuring market time then
is the basic foundation of any trading platform. [Starts with our splitter]. The
next step is to organize market data into non-random platforms. This allows one
to be in-step with developing market activity. It is important to be able to
stay in-step with the market and to do that traders need to trade its wholeness
[the entire time duration]. The payoff in trading for the non-floor trader is in
the markets largest moves. The same can be said of the entire moves of a smaller
nature. In reality, the market does not have many smaller platforms from which
to build success. Most traders then artificially fragment the whole nature of
opportunity. This puts them out of step with the market and hopefully in-step
with their program. In other words reliance is totally on self now. I want to
note here that good traders usually have a sound base of objective parameters
that allow them to function successfully. The also have the ability to extend
this base further when called for [very much like an athlete that uses his
training as a base and his will, determination, and focus are the extensions]. I
really do not think that such individualism can carry the entire load for long.
It need to be held in reserve and therefore provides to first step of a trader
moving to a management platform from a manpower one.

Time Management Base

Contract settings:

Observation-collecting data----splitter creates the vertical/horizontal
relationship necessary for market time determination. Auto organizer sets out
the minimum size of engagement units. The engagement units are the first means
of trader communications with the market [the real difference in Capflow 32 and
3.7 is in the size of the first engagement units]. The auto organizer setting
allows one to select a smaller or larger unit in relation to a normal trading
session. The page two mark settings allows the grouping of a much larger data
mass. Together they offer critical observations that reflect the change in
market activity while being stable. This stableness comes from capturing
non-random activity that is the reason for the marketplace existence.
[Individual bytes of market data tend to be random in nature, therefore a
process of assimilating them into larger engagement units is by itself a
movement to non-randomness as a base for further processing.]

Organizational---reading the data -- F4

The market activity database settings offer a very broad and tolerant band
for reading the smaller engagement units set out earlier. The range of the dots
[from red-green-blue] is from the more rapid to the slower moving. [Notice that
the setting before red is a line and represents the fastest movement.] There is
no ideal setting as most market change quite rapidly depending on the nature of
the trade at the moment. The settings serve like a large net ---the width of
which is determined by the gross horizontal difference between the
choices.[first and last] This horizontal movement represents market time i.e.
slow or fast and is relative to the whole of the set complex. The basic test of
the settings [regardless of the size of the engagement unit’s chosen] is to be
able to determine the meaning of the blue dots. The way to do that is to look at
the fourth unit preceding the blue dot noting the direction to the blue i.e. if
the direction is down then the market is slowing due to the buying [forcing the
market more horizontal] and vice versa if it is rallying. The other dots covey
the same message only at a faster pace. A line means that time was not available
for anyone to take advantage of the opportunity. [Whatever] Where the blues do
in fact hold [both the up and down] the market will move sideways, where one
side fails the market will be directional.

The page two marks are shown as clear square boxes overlaid upon the dots and
line of the earlier discussed settings [F4]. The amount of raw data making up
the mass of a page two mark is quite variable. Each mark is formed with some
type of vertical movement at the end of the data mass. This means that the
market was moving directionally at that time. One can then notice that a very
brief amount of time is spent on one side of the mark. This again illustrates
the non-random characteristic nature of the market and allows us to use a series
of page two marks to depict the whole or largest non-random measurement of
market activity in later programs.

USING ECONOMIC MEASUREMENT TO AN ADVANTAGE

The first exchange was born out of necessity. Since exchanges are still with
us, the service provided had to have economic justification and that
justification needs to be examined. Economics are a form of measurement so we
need to fit our analysis to the measurement of this fundamental need. The core
order flow coming to a marketplace is never balanced between buy/sell volumes
nor do these imbalances correct themselves over time [one side is always
imbalanced—also note that it is not the job of the marketplace to find and
maintain a balance so it doesn’t]. This consistency is of major importance to
the trader as it can be defined as non-random. It is important to note that
while each individual trade is of itself random, the collection of all such
orders into a flow changes this individual designation to one of non-randomness.
This creates the need for the exchange [third party participation] and becomes
the basis of measurements that allow economic objectivity to aid the trader.

There are two basic conditions that set the tone for this analysis. The
participants’ i.e. the buyers-sellers-third party create the atmosphere. Where
the third party is dominant, the buyers and seller are forced to trade at the
same prices in a fair area. The dominant [if present] force is determined then
by one party forcing the others to participate in their direction. Where the
third party is not dominant, the flow coming from the buyers or sellers is in
control by default. Markets will shift between these modes making trading
activity more difficult to read. Regardless of the mode, a trader needs always
to be on the side of dominance for objective control.

F10—defining the flows

The data is converted into designation indicators of heavy buying [buy flow]
and light selling. [Blue pluses and green minuses.] Selling flow are made up of
red minuses and green pluses. These respective combinations represent the whole—a
non-fragmented measurement that represents the basic non-random nature
reflecting a flow. [Note that by definition heavy activity in one direction has
to be accompanied by lighter of the opposite.]

The beginning of the flow is defined in a broad rather than narrow context.
The page two marks constitute a means of determining flow continuation due to
the fact that a directional flow has shown the third page two mark back will not
be violated. We have used a violation [market penetration of third page two
mark] as an arbitrary start to a new flow direction. A blue or red triangle is
used to indicate the beginning of such activity. To cover for the more random
designation of a flow beginning, we have extended linearly [through time] the
definition of this beginning to include a start, a continuation, and an end.
Since the flow in made up of dominate activity, trading after the start [where
non-randomness is present] provides the a foundation for consistent success. The
focus remains trading this consistent whole while sacrificing the more
fragmented [therefore random] entry process. The same holds for the exit
process. Entry and exit are the most difficult things to do and they will be
explained in a later section that deals with the economics of the marketplace.
[Note that the role of the individual is not high]

F4—contract economics

Most commodity contracts are written for very broad rather than narrow use.
As the market moves directionally, it attracts participation that is diverse and
not highly concentrated on an individual basis. [The same holds for stocks]
Collectively, it is a far different story, as most of this attracted volume
tends to sell rallies and buy breaks. The force is not nearly as great as core
activity in that it can not bring immediate change to what is going on in the
market. It is rather the response to directional activity caused by the core
flows and in of itself can remain remarkably persistent. Its persistence then
allows a measurement that is non-random and further allows one to trade where
the economics of what is taken place is wrong rather than right. Core flow
activity is much stronger than contract economics and having contract economic
being wrong [remember contract economics counters it] only increases the
strength of the flow as now those wrong have to exit in the direction of the
flow.

The economics of the marketplace

Liquidity is the backbone of any market. It provides a means to enter and
exit the market at a reasonable cost basis. Its foundation is that the market is
a disadvantaged situation most of the time. Experience has shown that most good
fills end up as bad trades while the opposite is true of bad fills. Another easy
indicator for experienced traders to read is that when the market looks the best
it is not good and vice versa when it looks the worst. There are many other
reasons we can site but if it was advantageous most of the time no one would
make the opposite trade and there would be no liquidity. The economics of
trading revolve around this paradox. It is countered by ease of entry exit
[liquidity] that allows participants to approach the market from a gross rather
than selective viewpoint. Most non-floor traders have adopted the selective
viewpoint unfortunately because of costs and trying to be perfect. They then are
forced to look for the needle in the haystack because the advantageous
situations are mostly momentary. This start begins the process of breaking the
chain of connection from the model of the market to the trader. The market
payoff does not come in a way that rewards one consistently [because of the
basic disadvantage], but rather rewards one in a more sporadic manner [brief
moments]. The combination then of perfect entry/ exit combined with erratic
payoffs is most difficult for traders to overcome in the long run. A more or
less random entry /exit coupled with a winnowing program that drops the losing
trades would then give by default the good ones. This has the equilivancy of
having unchanged on your side in a relative way and far exceeds what the
individual can do in the disjointed program outside the model of the market.
[See our longevity program]

ILLUSTRATED NON-RANDOM PLATFORMS OF CAPFLOW 32--WHOLENESS

The core non-random flow can be measured by the third page two mark [linear
progressive market time] in any dynamic situations [forward market development].
By staying inside of this measurement the market illustrates its confirmation to
this basic fundamental of trading and markets. It is a whole meaning that any
aberrations within this movement are not recognized. This process can be
fragmented at a measured cost or benefit. One must note that a good trade of any
medium duration can always be fragmented into parts, however, the ensuing
results must exceed the passive result of the whole in order for the effort to
be economic. Most traders have a static uniform segment [related to time or
dollar amount] that automatically fragments this whole and on balance is more
counter- productive than productive.

A winnowing process that establishes exiting [using the basis of unchanged on
your side] as a selection process is one that fits the model of the market in
two important ways. First, it does not seek an advantageous situation as a
selective process, and second it allows maximum exposure to the sporadic nature
of market payoffs. It defaults into the traded product largest directional move.
The more difficult entry/exit processes are not featured at all as part of this
program as the random [it is random because it alternates] occurrence of a third
page two mark is the trigger for both entry and exit. This does not mean that
these two areas can not be addressed by the trader, but the work effort needs to
be an improvement over the randomness. The characteristics of the winning trades
are that they will last much longer in terms of time than those that do not work
out. One can clearly see this by using our longevity program where trades are
listed by date and sorted for flow direction. The program can be considered a
raised platform as it has a positive basis [winning by design] from which to
approach your trading goals.

Defining the whole---where economics are not working for a class of traders

Core activity is made of non-random thrusts that are usually meet with
passive resistance [contract economics] to the opportunity it presented. In
other words trade of an opposite nature. This activity is also non-random and is
mostly within the boundaries of the core flow activity [the largest whole that
we define] Normally, this type of activity [being inside of] would constitute a
fragmentation of the former. However, we are not using it to breakdown the core
flow, but are looking at it as an independent whole within the context of its
own usage. It instead is an internal non-random event. Where it starts and ends
can extend be well out side of core flow because of this independence. What we
are looking at here is a lessor force of activity that is being overcome by a
larger one. We have created thrust display and have overlaid the response to
directional market activity [F4] on top of the thrusts [black-up—red-down].
This display is triggered [F8] by moving the cursor to the left of the page
creating a red horizontal line after triggering F10. The dots/lines of F4 are
placed on top of the thrusts. {I would like to point out that this display can
do a lot more for us and we will illustrate other points at a later date}

The essence of this program is that we are going to follow economic
measurements thus produced and trade their entire length. The starting point
occurs at a random market juncture where any combination of alternating thrusts
that has at least one dot [each thrust] When the market exceeds this range, it
indicated that one side of the economic equation is wrong. [Note that this is
the same condition that big markets have—note the equilivancy relationship].
The trade is then continued if it remains above the top/bottom of the random
range until a counter thrust [with dot] to the trade direction is violated. At
this later point, a new trade can be made because a new random juncture has been
created.

Creating a whole-- trading cash flow will be the main topic at December 9th
class

Defining another whole—volume

Volume arises from the actual use of the market. It is therefore the closet
measurement possible to the start of non-randomness. Since it is internal
[within] and so close, the most used functionality is to use it to find break
points [that are counter or are returning to flow direction] that can fragment
larger non-random events. There is nothing wrong with using it in that way. It
can however stand alone as a non-random platform and that what we are going to
discuss here. Volume has different levels of usage and has parallels to the
disadvantageous situation in the marketplace. Most profiles [90-95%] have the
first half of the day with more volume the second half. The equilivancy ratio
rates with fact that the marketplace is disadvantageous [for liquidity] so one
can assume that the sample size of the normal volume dispersal is disadvantaged.
A trade condition where something needs to be overcome before any benefits can
start. Looking at the reversed situation, there has to be a force in place
[equivalent ratio---to the heavy activity of respective flows—pluses-- minuses
of F10] to have changed the situation. This force then needs to be removed and
this normally takes some time. Time is the equivalent to non-randomness. This is
not much different than a large trader extending time by taking all adverse
order flow. Note the importance of the equivalency ratio to understanding how to
set up various outputs. Our block volume display illustrates the first/second
half profile volume and our volume iteration platform allows a great deal more
combinations to be exposed. Its recall display currently has a more random
output, which makes it difficult for the inexperienced. We are in the process
creating an additional iteration platform that creates more of a whole output.
The only key to using it is to understand ways volume can extend time [and
therefore present conditions forward] so that any aberrations will be absorbed
into the whole without impeding the opportunity.

Defining a whole---order flow imbalances CBOT

This information is a similar measurement to taking soundings on the depth of
a river. The measurement tends to be varied but still non-random within an
accepted norm of change. Our initial displays [since they are taken from day
units] have tended to be analyzed in a more random than non-random fashion
because of the presentation. They are very hard to use in that manner, as all
platforms for trading need to be organized into non-random platforms. We are in
the process of creating additional displays so that the non-random
characteristic is brought to better focus.

The source of OFI comes from the combined activity of the core flows and
contract economics. It would be nice to have separate data for each because they
are counter to each other. Still it is a very valuable display in meaningful
non-random formats. Our first format is to divide the buy orders into the sell
orders and come to a ratio. This is then displayed either on top [less than one]
or bottom [greater than one] of the profile. The ratio gives an order size
imbalance as the sounding [a ratio greater than one indicates larger buy orders
and one less than one indicates the imbalance for sell orders]. The largeness of
the orders can be construed as commitment and commitment means stability.
Therefore the direction [up/down] should hold or advance. What this means is
that given a selling or buyer ratio, the low or high of the previous day should
not be taken out for long [three time period is to much] and there is a good
chance that the direction will continue. The non-randomness then is extended to
having the new activity equal [opposite] to the previous profile or moved in a
positive way directionally.

The serial nature of the activity also creates a non-random base in that the
soundings of the core flow should be consistent. We have created a columnar
display where orders per contract are listed.[left click on news] This offers
more than I can spend the time on right and will be discussed in the December
class.

In an attempt to take the data outside of the combined category, we have
created a visual program that color-codes the individual units as per buy/sell
ratio. This display serially depicts the random/non random characteristics of
the data and at the same time allows an objective view of the effects of the
trade generating from contract economics. The tolerance level is quite high as a
missed diagnosis has pretty much the same effect [equivalency ratio again].